Related Party Transactions

9 Months Ended

Sep. 30, 2020

In the normal course of business, we conduct transactions with HSBC and its subsidiaries. HSBC policy requires that these transactions occur at prevailing market rates and terms and, where applicable, these transactions are compliant with United States banking regulations. All extensions of credit by (and certain credit exposures of) HSBC Bank USA, National Association (together with its subsidiaries, "HSBC Bank USA") to other HSBC affiliates (other than Federal Deposit Insurance Corporation insured banks) are legally required to be secured by eligible collateral. The following tables present related party balances and the income (expense) generated by related party transactions:


	September 30, 2020		December 31, 2019
	(in millions)
Assets:
Cash and due from banks	$	677	$	850
Interest bearing deposits with banks	26		40
Securities purchased under agreements to resell⁽¹⁾	2,185		4,600
Trading assets	470		79
Loans	1,180		2,343
Other⁽²⁾	360		456
Total assets	$	4,898	$	8,368
Liabilities:
Deposits	$	18,397	$	9,000
Trading liabilities	324		293
Short-term borrowings	949		1,166
Long-term debt	2,866		7,848
Other⁽²⁾	194		931
Total liabilities	$	22,730	$	19,238

⁽¹⁾Reflects purchases of securities under which other HSBC affiliates have agreed to repurchase.

⁽²⁾Other assets and other liabilities primarily consist of derivative balances associated with hedging activities and other miscellaneous account receivables and payables.


	Three Months Ended September 30,						Nine Months Ended September 30,
	2020		2019		2020		2019
	(in millions)
Income (Expense):
Interest income	$	9	$	44	$	47	$	134
Interest expense	(77)		(151)		(276)		(427)
Net interest expense	(68)		(107)		(229)		(293)
Trading revenue (expense)	(1,755)		551		(2,372)		(972)
Servicing and other fees from HSBC affiliates:
HSBC Bank plc	43		40		131		121
HSBC Markets (USA) Inc. ("HMUS")	27		27		84		84

Other HSBC affiliates	9		21		40		52
Total servicing and other fees from HSBC affiliates	79		88		255		257
Gain (loss) on instruments designated at fair value and related derivatives	307		98		(203)		1,518
Support services from HSBC affiliates:
HTSU	(285)		(274)		(820)		(849)
HMUS	(17)		(24)		(63)		(74)
Other HSBC affiliates	(89)		(96)		(279)		(262)
Total support services from HSBC affiliates	(391)		(394)		(1,162)		(1,185)
Rental income from HSBC affiliates, net⁽¹⁾	13		16		31		40
Stock based compensation expense⁽²⁾	(3)		(6)		(16)		(20)

⁽¹⁾We receive rental income from our affiliates, and in some cases pay rental expense to our affiliates, for rent on certain office space. Net rental income from our affiliates is recorded as a component of occupancy expense, net in our consolidated statement of income (loss).

⁽²⁾Employees may participate in one or more stock compensation plans sponsored by HSBC. These expenses are included in salaries and employee benefits in our consolidated statement of income (loss). Certain employees are also eligible to participate in a defined benefit pension plan and other postretirement plans sponsored by HSBC North America which are discussed in Note 12, "Pension and Other Postretirement Benefits."

Funding Arrangements with HSBC Affiliates:

We use HSBC affiliates to fund a portion of our borrowing and liquidity needs. At September 30, 2020 and December 31, 2019, long-term debt with affiliates reflected $2.9 billion and $7.8 billion, respectively, of borrowings from HSBC North America. During the first nine months of 2020, $5.0 billion of these borrowings were recharacterized as time deposits, including $1.5 billion of fixed-rate senior debt which matures in March 2021, $2.0 billion of fixed-rate senior debt which matures in May 2021 and $1.5 billion of fixed-rate senior debt which matures in March 2026. The remaining outstanding balances include $0.9 billion of floating-rate subordinated debt which matures in May 2025 and $2.0 billion of fixed-rate senior debt which matures in September 2025.

At December 31, 2019, we had a $150 million uncommitted line of credit with HSBC North America. During the third quarter of 2020, this credit facility was terminated and replaced by a $4.0 billion uncommitted line of credit with HSBC North America. The available borrowing capacity under this new facility is fungible between HSBC USA, HSBC Securities (USA) Inc. ("HSI") and HSBC North America, but total borrowings cannot collectively exceed $4.0 billion at any time. There was no outstanding balance under these credit facilities at either September 30, 2020 or December 31, 2019.

We have also incurred short-term borrowings with certain affiliates, largely securities sold under repurchase agreements with HSI. In addition, certain affiliates have also placed deposits with us.

Lending and Derivative Related Arrangements Extended to HSBC Affiliates:

At September 30, 2020 and December 31, 2019, we had the following loan balances outstanding with HSBC affiliates:


	September 30, 2020		December 31, 2019
	(in millions)

HMUS and subsidiaries	$	1,088	$	2,296





Other short-term affiliate lending	92		47
Total loans	$	1,180	$	2,343

HMUS and subsidiaries We have extended loans and lines, some of them uncommitted, to HMUS and its subsidiaries in the amount of $12.0 billion at both September 30, 2020 and December 31, 2019 of which $1.1 billion and $2.3 billion, respectively, was outstanding. The maturities of the outstanding balances range from overnight to three months. Each borrowing is re-evaluated prior to its maturity date and either extended or allowed to mature.

We have extended lines of credit to various other HSBC affiliates totaling $3.4 billion which did not have any outstanding balances at either September 30, 2020 or December 31, 2019.

Other short-term affiliate lending In addition to loans and lines extended to affiliates discussed above, from time to time we may extend loans to affiliates which are generally short term in nature. At September 30, 2020 and December 31, 2019, there were $92 million and $47 million, respectively, of these loans outstanding.

Derivative contracts As part of a global HSBC strategy to offset interest rate or other market risks associated with certain securities, debt issues and derivative contracts with unaffiliated third parties, we routinely enter into derivative transactions with HSBC Bank plc and other HSBC affiliates. The notional value of derivative contracts related to these transactions was approximately $862.7 billion and $1,111.5 billion at September 30, 2020 and December 31, 2019, respectively. The net credit exposure (defined as the net fair value of derivative assets and liabilities, including any collateral received) related to the contracts was approximately $491 million and $90 million at September 30, 2020 and December 31, 2019, respectively. Our Global Banking and Markets business accounts for these transactions on a mark to market basis, with the change in value of contracts with HSBC affiliates substantially offset by the change in value of related contracts entered into with unaffiliated third parties.

As discussed further in Note 2, "Strategic Initiatives," during the third quarter of 2020, we began to transfer certain interest rate derivative contracts to HSBC Bank plc as part of our Restructuring Plan.

Services Provided Between HSBC Affiliates:

Under multiple service level agreements, we provide services to and receive services from various HSBC affiliates. These activities are summarized in Note 23, "Related Party Transactions," in our 2019 Form 10-K. There have been no significant changes in these activities since December 31, 2019.

Other Transactions with HSBC Affiliates:

At both September 30, 2020 and December 31, 2019, we had $1,265 million of non-cumulative preferred stock issued and outstanding to HSBC North America. See Note 18, "Preferred Stock," in our 2019 Form 10-K for additional details.